LESS COMPLICATING

Less Complicating. June 2018.
By Timothy S. Barkley, Sr.

First, the phone call.

“Can you look over our wills and trusts? It’s been a few years, and we want somebody to make sure they’re up-to-date. And we’re going on vacation and want to make sure everything is covered in case something happens.”

Certainly. Let’s get together. Next week?

The meeting.

“We had this done about twenty years ago by a lawyer in Rockville. I read your articles, and I keep hearing about changes in the tax laws. Can you look at this and tell us if we have to change anything?”

The lawyer assents, hefts the proffered three-ring binder of estate papers, and begins to flip through. “This plan creates two trusts, to protect your kids from estate tax when the second of you dies. When your plan was created in 1996, the federal and Maryland estate tax exemptions were only $600,000. Do you have any idea what your estate value was then?”

The clients take back the notebook and leaf through the papers behind the “PLAN SUMMARY” tab. “It says here, ‘your estate is valued at approximately $1.0 million.’”

“That means that your estate was fully taxable in 1996, and the total combined estate tax would have been about 40% of the excess over the $600,000 exemption, or $160,000. That was a powerful incentive to avoid the tax!”

The couple across the table nod agreement. “We did all this to save the kids a boatload of tax. But you’re telling us that there’s no tax anymore?”

“No, not that there’s no estate tax, but that the amount you can pass tax-free is a lot higher. Can you tell me about your estate – what’s your net worth now? If we sold everything, paid all the debts, collected on your life insurance and cashed in your retirement plans and IRAs, what would the total be?”

The clients glance at each other, and one starts a column of numbers. With some finagling, they come up with a total: “Around two million, give or take.”

The lawyer nods thanks. “You don’t have a federal estate tax issue. That tax kicks in at about $11 million, and that number doubles for a married couple, without any advance planning. So that’s one problem you don’t have to worry about – as nice as it might be to have to worry about that.” All smile.

“You don’t have a Maryland estate tax issue, either. The Maryland estate tax is $5.0 million. And the Maryland exemption also doubles for a married couple, even if they don’t do any tax avoidance planning.

“So you don’t have any tax exposure at all, unless you win the lottery.”

The wife quips, “You gotta play to win, and I don’t like to waste money. I’d rather go out to dinner. That way I get something for my money!”

The lawyer gives a “thumbs-up” and continues, “This year, you can pass about $22 million free of federal estate tax, and $10 million free of Maryland estate tax – without any special trusts or planning. So probably no tax actually payable unless your investment guru does very well indeed.”

She looks at him and he grins. She says, “Behold, the guru. He does OK, but not that well.” All laugh.

“So you don’t need the complex trusts in your current estate plan to avoid tax. You have two options. First, you can just shut down the current plan and start with a new trust or will arrangement. The benefit of that is that you don’t have any baggage left over from the old plan.

“The second option is to collapse the old trusts into one new trust. That trust would be simpler to run when you passed away. It wouldn’t avoid estate tax, but unless you’re unlucky – or very fortunate, depending on how you look at it – you won’t need tax avoidance. We’d transfer title of assets in the old trusts into the new trust, but because we could never be sure we had everything out of the old trusts, we’d keep them on the shelf and amend them to pay out to the new trust when you died.

“We would update your powers of attorney and medical directives – ‘living wills’ – at the same time to catch up with changes in the law and medical technology and terminology.

“What do you think?”

“I think the first option makes sense,” she says. “The only thing we ever put in the trust was our house, actually, and we’ve moved since then, so there’s really nothing in the trust. And we can catch up on other things. The kids are in their thirties, so they certainly don’t need a guardian, and they are old enough to be executor, power of attorney and everything.”